Q: Where did the money go?
A: To the people who sold houses during the bubble and to those who collected fees on those transactions.
Q: Where did the money come from?
A: Mostly, from those who financed those transactions, but only briefly.
Q: Where did the money ultimately come from?
A: From those who bought those mortgages after they had been "structured" into financial sausages called "Collateralized Debt Obligations" (CDOs).
Q: Who bought those CDOs?
A: Banks, mutual funds, pension plans, and foreign governments.
Q: Those institutions have professional advisors. Didn’t they realize that the housing bubble would eventually burst?
Q: Why not?
A: They claim to have had PhD mathematical economists telling them that those investments were safe.
Q: How could PhD scientists be so stupid?
A: They weren’t.
A: Semantically speaking, mathematicians and economists usually speak and work in the subjunctive mode.
Q: What does that mean?
A: They make assumptions.
Q: What assumptions led to the ruin of this planet’s economy?
A: The assumption of the statistical independence of defaults.
Q: What does that mean?
A: They were assuming that you defaulting on your mortage and me defaulting on mine were totally uncorrelated random variables.
Q: So what?
A: If the bubble burst, those would be be correlated. So, by implication, they were assuming that the bubble would never burst. It’s just that they didn’t say it in those terms.
Q: Why didn’t the PhD economists say something?
A: Research economists are legendary for always stating their assumptions, hence the old academic joke:
A chemist, a physicist, and an economist are marooned on a desert island; fortunately they find a crate of canned food that washed up on shore, but they have no can opener. They decide that they’re all smart guys, so they’ll take some time to figure out a plan.
The chemist says, "We can build a fire out of driftwood and put the cans over it. The heat will cause the cans’ contents to expand, and they’ll burst open. Then we can eat the food."
The physicist and says, "How about this: we’ll build a primitive catapult out of saplings and vines. We can use it to hurl the cans against those rocks over there. The impact will break the cans open so we can get to the food."
The economist says, "No, wait, I’ve got it! First, assume the existence of a can opener."
Q: Didn’t the professional advisors understand that?
A: They were looking like heros to their bosses, while the bubble was expanding. Per Updon Sinclair: "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"
Q: Well why can’t the politicians simply recognize that the money is gone?
A: They got stuck in first three stages of Kubler-Ross’s model of grief (denial, anger, and bargaining) as the the economy went into depression. (Pun unintended.)
Q: What can be done?
A: Nothing. Per Kubler-Ross, we will eventually accept the fact that that money is gone:
— Home prices will fall to their pre-bubble levels or lower.
— The CDOs they collateralize will fall with them.
— The banks will mark them to market.
— The large banks will collape.
Q: What will happen in the mean time?
A: The large banks will pay their elected accomplices to cover their losses with taxpayers’ money.
Q: How will they do that?
A: Via multiple strategems:
— They will hold their breath and stamp their feet.
— They will insist that these CDO’s values will return. "It’s only a crisis of confidence. Those home retain their intrinsic worth uses
through even through the ups and downs of the economy."
— They will ask for non-recourse loans (aka "free money") of freshly printed money with which to buy each others’
toxic misunderstood assets thereby re-inflating the busted bubble. And thereby laundering the loss from the private side to the public side."
— They will suggest printing fresh money to make those loans
— They will plead not for themeselves but for the sake of the economy and the nation as a
— They will assure the taxpayers that it won’t cost a thing
Q: Doesn’t the Obama/Geithner plan minimize the moral hazard by forcing the Hedge Funds cover 3% of each transaction with their own money?
A: The Obama/Geithner plan is brilliant in its ability to Obfuscate the transfer of real loss from the investment banks to the taxpayers, simultaneously creating profit opportunities for hedge funds:
— Helicopter Ben has recently printed up another trillion BenBucks.
— My Hedge Fund (MHF) will gladly borrow $97M BenBucks to purchase $100M of misunderstood assets (worth $50M at market) from Citi.
— MHF will insist, however, on a $10M CDS to cover the risk.
— MHF will eventually default, forfeiting its $3M.
— MHF will then file a CDS claim and collect $10M and its pocket $7M.
— Citi will write off that $10M of its real $50M loss.
— The government will seize the assets, and sell them for $50M.
— The government will eventually have to tax those other $47M BenBucks out of circulation lest they contribute to inflationary pressures.